STRENGTHS

Geostrategic position at the entrance to the Red Sea and supported by the international community

WEAKNESSES

High risk of over-indebtedness

Increasingly dependent on Ethiopia and China

Endemic poverty and unemployment

Difficult business climate

Dry climate

Risk assessment

Growth, thanks to port activity, is enjoying the fruits of investment

In 2018, Djibouti’s growth will likely continue to be driven by substantial investment, particularly in transport and public services, and the economic fruits of recently completed projects. With its strategic geographic location and deep-water port, the country intends to become a hub for intermodal transport in East Africa. Located on the second most heavily used shipping route in the world (20% of world exports; 10% of oil transit), the multipurpose Port of Doraleh – officially inaugurated in June 2017 after modernisation works amounting to USD 590 million – is set to help strengthen Djibouti’s trading position in 2018. The Ports of Tadjourah and Goubet, inaugurated a few weeks after that of Doraleh, give the country the infrastructure it needs to accelerate exports of potash and salt.

This port infrastructure is connected to a transport network that notably includes the Djibouti-Addis Ababa railway line. With an expected completion date at the end of 2018, the construction of the Djibouti Silk Road Station, a free-trade zone financed by Chinese investment, is expected to stimulate private sector activity and FDI flows. Apart from transport, other tertiary sector industries stand out, including construction, which was boosted by infrastructure projects springing up in the field of renewable energy, such as the construction of a solar farm, and planned exploratory drilling starting in 2018 aimed at exploiting the geothermal potential.

Despite robust economic growth in recent years, poverty and unemployment remain endemic. Job creation has mainly benefited expatriate workers, as the local workforce lacks the necessary skills. In addition, with an economy primarily focused on transport and associated services, Djibouti is exposed to a slowdown in trade flows in the region – especially in Ethiopia, which uses Djibouti for 95% of its imports. The unstable security and political environment in Somalia, Eritrea, and Yemen further exposes Djibouti to this slowdown risk. Economic slowdown in China, which finances most of the country’s investment projects, would also impact Djibouti’s growth.

Inflation is expected to remain moderate in 2018, thanks notably to the pegging of the Djibouti franc to the US dollar.

Twin deficits and a legacy of over-indebtedness

Investments agreed for 2014-2016 have placed great strain on the national budget. However, the budget deficit ratios improved in 2017, partly thanks to controlled current spending, but above all due to a cut in capital investment spending. The latter, having reached a peak of almost 36% of GDP in 2015, is expected to be maintained at less than 8% in 2018, which will allow continued deficit reduction. Nevertheless, revenue collection, which is still unsatisfactory, will likely only increase modestly. Furthermore, higher debt-servicing costs will absorb a proportion of the increased income.

The current account deficit is expected to fall, thanks to exports rising faster than imports. This is because exports will benefit notably from the completion of the port projects, while imports of capital goods are expected to slow as capital investment spending slows.

Investment projects – financed by non-concessional debt taken out mostly with China or the object of a PPP guaranteed by the State – have pushed all borrowing ratios into the red. The construction of the multipurpose port, the Djibouti-Addis-Ababa railway line, and the Ethiopia-Djibouti water pipeline mainly account for the increased debt burden, giving rise to a high risk of over-indebtedness.

Djibouti - outpost of the international fight against terrorism and piracy

President Ismail Omar Guelleh (IOG), who has maintained a tight grip on power since 1999, was re-elected in April 2016 in a landslide victory. Faced by a fragmented opposition subject to regular intimidation, his party – the People’s Rally for Progress – is unlikely to be threatened by the parliamentary elections in February 2018. Accusations of patronage and corruption regularly levelled against IOG and his administration account only in part for the business climate, characterised namely by shortcomings regarding the fulfilment of contracts, access to credit, and investor protection.

Despite this, thanks to its strategic location, Djibouti enjoys the support of numerous international governments. China, in particular, set up its first foreign military base in Djibouti in 2017. China’s military establishment present alongside military bases established by France, the United States, and Japan, among others. The strategic challenges posed by the Strait of Bab el-Mandeb, and its proximity to the regions in crisis of Africa and the Middle East, make Djibouti a key military outpost in the fight against piracy and terrorism.